PayPal spawn have advanced where PayPal stood still

Wed Oct 1, 2014 6:48pm EDT
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By Sarah McBride and Deepa Seetharaman

SAN FRANCISCO (Reuters) - PayPal's biggest threat as it prepares to split from eBay (EBAY.O: Quote) next year may come from former employees who back a crop of new businesses serving shoppers who increasingly prefer to pay with mobile phones rather than personal computers.

Though none of the new companies have the breadth of services offered by PayPal, which has more than 152 million users and deep ties to merchants like Home Depot both online and off, they are entering areas that the once-nimble online-payments service should own - but doesn't.

Stripe, which helps merchants like Apple Inc (AAPL.O: Quote) and car-sharing service Lyft accept payments made by smart phones, is backed by PayPal co-founder and former chief executive Peter Thiel and former chief financial officer Roelof Botha. Thiel co-founded Founders Fund while Botha is a partner at Sequoia Capital.

Square, a start-up that lets merchants accept credit-card payments over mobile phones and tablets with smaller fees than they had been paying via traditional credit-card networks, is also backed by Botha. Affirm, founded by Max Levchin, PayPal's former chief technology officer, offers split-second financing to shoppers.

"The reality is that innovation of payments is moving so fast and PayPal is behind the curve on every dimension," said Keith Rabois, a former PayPal vice president who now backs both Stripe and Square through Khosla Ventures and sits on Affirm's board. "I would expect that both (Stripe and Square) could be larger than PayPal."

PayPal's spinoff, announced on Tuesday, comes as Apple prepares to launch its own mobile wallet, Apple Pay, a move that payments experts said may fundamentally shift the payments landscape by letting customers pay for goods in stores by tapping their phones at a compatible point-of-sale system. The payments are authorized by their fingerprint and incorporate some aspects of Stripe.

Ebay said that as an independent company PayPal will be able to compete in all kinds of electronic payments. "PayPal's opportunities have never been greater – it is a rapidly growing global leader in digital payments and the most trusted digital wallet," an eBay spokeswoman said.

Some early PayPal employees, known as the PayPal "mafia" around Silicon Valley, think the company still has some zip.   Continued...

A PayPal sign is seen at an office building in San Jose, California May 28, 2014. REUTERS/Beck Diefenbach